ESMA chair wants objectivity, open minds for crypto-asset regulation

The chair of the European Securities and Markets Authority (ESMA) has called for objectivity and open mindedness from regulators in developing regulatory frameworks for crypto-assets and distributed ledger technology (DLT), while highlighting industry calls for the technology to deliver on its early promise.

During a keynote speech at a FinTech Conference in Brussels, Steven Maijoor outlined ESMA’s work to date and current position on the regulation of crypto-based assets and the underlying technology, the majority of which is based on DLT or blockchain systems.

“Crypto-assets and the underlying DLT command our attention because they are at the frontier of innovation,” Maijoor said during the Association for Financial Markets in Europe (AFME) event. “They therefore pose a challenge to firms, who seek to turn the promise of frontier technology into workable business models. Likewise, crypto-assets and DLT pose a challenge of regulators, because they are partly in unchartered territory.”

Referencing “commentators and analysts” that are increasingly calling on crypto market participants to begin delivering on the early promise, and subsequent market hyperbole, of the technology, Maijoor underlined the importance of regulatory bodies remaining “objective, with an open mind but a critical eye.”

Regulation for crypto-assets has often been cited as one of the main challenges hindering greater institutional take-up of crypto-related activities, with firms on both the buy- and sell-sides unwilling to move into the space, or at least publicly so, until further regulatory clarity had been provided.

Maijoor also highlighted how the nature of crypto technologies require a level of decentralisation and, as such, present another layer of challenges for both market participants and regulators, particularly as the technologies have yet to evolve far beyond the initial stages.

“Creating immutable records required enormous computing power. And it did not solve the problem of trust, as decentralisation brought the risk of fraud and money laundering,” he commented.

“Decentralisation is hard to square with some of the features we need in the financial markets, such as clear ownership, clear responsibilities and a degree of privacy. It also makes security very costly, financially and environmentally.”

Definitions

In January this year, ESMA authored and published advice to the European Commission, Council and Parliament that certain platforms ought to be subject to the regulation, according to three broad categories.

Those platforms trading crypto-assets that have a central order book and/or match orders under other trading models are likely to qualify as multilateral systems and therefore should operate under MiFID II regulation, while platforms that are dealing on their own account and executing client orders against proprietary capital would qualify as broker dealers, rather than as a multilateral trading venue, and so should also comply with the requirements.

During his speech, Maijoor again underlined ESMA’s advice, however he clarified that while most European national authorities agree that crypto-assets “are likely to qualify as MiFID financial instruments”, regulators cannot legally qualify crypto-assets through a “one size fits all” approach and that investors may not be able to distinguish if certain crypto-assets fall under the purview of regulatory bodies or not.

“Importantly, we believe that a more elaborate bespoke regime for those crypto-assets that do not qualify as financial instruments is premature,” Maijoor concluded. “A more elaborate regime may risk legitimising crypto-assets and encouraging greater participation. Any novel framework should also protect the integrity of existing capital markets and be flexible enough to capture the variety of risk factors that the different types of cryto-assets introduce.”